Single Supervisory Mechanism

Under the Single Supervisory Mechanism the European Central Bank is the direct prudential supervisor of banks classified as significant in participating member states. Less significant institutions are supervised by their national competent authority, inside a framework the ECB sets and oversees, and the ECB can take direct responsibility for one if it chooses to.

The annual supervisory review and evaluation process is what sets bank specific capital. It produces a Pillar 2 requirement, which is binding and sits inside the trigger for restricted distributions, and Pillar 2 guidance, which is not binding and sits above the combined buffer, so missing guidance does not cap anything. Treating the two as the same thing is a common and visible error.

Supervisory permission is also needed before a bank reduces its own funds, which is why European buyback announcements are routinely made subject to approval rather than stated as settled. Capital return at a bank is a supervised decision, not a board decision alone.

The United Kingdom sits outside this architecture. UK banks are supervised by the Prudential Regulation Authority, with conduct sitting at the Financial Conduct Authority, under a buffer framework built on the same logic with different names. Knowing which regime a bank falls under, before commenting on whether its ratio looks comfortable, is a quick way to show you have looked at the market rather than at a textbook.